Brown & Brown, Inc. — FY2018 Form 10-K Summary
Business context and reporting period
Brown & Brown is a diversified insurance intermediary providing retail brokerage, national insurance programs, wholesale brokerage and insurance-related services. The filing covers the fiscal year ended December 31, 2018; fourth-quarter results are included but the report is annual. The Company operated from 286 locations in 42 states and internationally, with 9,590 full-time equivalent employees.
Revenue is generated primarily from insurance commissions and fees. The four reportable segments were Retail, National Programs, Wholesale Brokerage and Services.
Financial performance and key metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total revenues | $2.014 billion | $1.881 billion | +7.1% |
| Commissions and fees | $2.010 billion | $1.857 billion | +8.2% |
| Core commissions and fees | $1.944 billion | $1.795 billion | +8.3% |
| Income before taxes | $462.5 million | $449.7 million | +2.8% |
| Net income | $344.3 million | $399.6 million | -13.8% |
| Diluted EPS | $1.22 | $1.40 | -12.9% |
| Operating cash flow | $567.5 million | $442.0 million | +28.4% |
| EBITDAC | $615.4 million | $605.4 million | +1.7% |
| EBITDAC margin | 30.6% | 32.2% | -160 basis points |
The income-before-tax margin was 23.0%, compared with 23.9% in 2017. The effective tax rate increased to 25.6% from 11.1%, primarily because 2017 included a $120.9 million tax benefit from the Tax Cuts and Jobs Act. Excluding the reported tax benefit, the 2017 comparison is less favorable than the headline net-income decline suggests.
- Retail commissions and fees increased 10.6% to $1.042 billion; organic revenue growth was 3.0%.
- National Programs commissions and fees increased 3.1% to $493.9 million; organic revenue declined 0.9%, primarily because of lower weather-related flood claims revenue.
- Wholesale Brokerage commissions and fees increased 5.6% to $286.4 million; organic revenue growth was 5.7%.
- Services commissions and fees increased 14.5% to $189.0 million; organic revenue growth was 3.4%.
Cash flow, liquidity, debt and capital allocation
- Cash and cash equivalents were $439.0 million at December 31, 2018, down from $573.4 million. Cash and cash equivalents including restricted cash were $777.6 million.
- Cash used in investing activities was $951.8 million, including $923.9 million for acquisitions and $41.5 million for capital expenditures.
- The Company paid $84.7 million in dividends and used $100.0 million for share repurchases, including a December 2018 accelerated share repurchase agreement.
- Total debt was $1.507 billion, compared with $976.1 million at year-end 2017. The increase primarily funded the Hays acquisition and reflected new revolving and term-loan borrowings.
- The Company had an $800 million revolving facility maturing in 2022 and stated that cash, investments, operating cash flow and available borrowing capacity should satisfy normal liquidity needs for at least the next twelve months.
- Current assets exceeded current liabilities by a 1.22 current ratio at year-end, versus 1.13 in 2017. Management reported compliance with all debt covenants.
Material changes versus the prior comparable period
- The Company adopted ASC 606 and related ASC 340 guidance using the modified retrospective method. Opening retained earnings increased by $117.5 million. Reported 2018 commissions and fees were $18.4 million higher than under the prior accounting policies, while reported net income was $12.4 million higher.
- Brown & Brown completed 23 acquisitions, including The Hays Group in November 2018 for $705 million at closing, consisting of $605 million in cash and $100 million in stock. The acquired businesses contributed $82.4 million of 2018 revenue after acquisition dates.
- Goodwill increased to $3.433 billion from $2.716 billion, primarily due to acquisitions. The Company reported no goodwill or amortizable intangible-asset impairments.
- Other income fell to $1.6 million from $22.5 million because 2017 included a $20.0 million legal settlement.
- Other operating expenses increased 17.2%, partly reflecting technology investment and the gross presentation of certain costs after ASC 606 adoption. Capital expenditures increased 71.6% to $41.5 million.
- Profit-sharing contingent commissions and guaranteed supplemental commissions increased 5.2% in aggregate, although contingent commissions declined in the Wholesale Brokerage Segment due to higher carrier loss ratios.
Guidance, outlook, commentary and risks
Management did not provide formal earnings guidance. It stated that, if insurable exposure units continued to increase and premium-rate changes remained similar to 2018, positive quarterly organic revenue growth was expected in 2019. The Company also anticipated approximately $30 million to $40 million of annual spending in both 2019 and 2020 for a new headquarters and office tower, with completion targeted for the fourth quarter of 2020.
Key risks include integration of Hays and other acquisitions, the ability to retain qualified personnel, competition and insurance-industry disintermediation, changes in premium rates and exposure units, regulatory and licensing changes, cybersecurity and data-privacy incidents, natural catastrophes in concentrated states, insurer capacity and credit risk, contingent commission variability, litigation and errors-and-omissions claims, floating-rate debt exposure, and potential goodwill impairment. The Company expects to invest $30 million to $40 million in a multi-year technology-platform upgrade, which may pressure margins and cash flow.
Contractual obligations totaled $2.230 billion, including $1.515 billion of long-term debt, $210.0 million of operating leases, $251.1 million of interest obligations and $198.6 million of maximum future acquisition contingency payments. Legal accruals were not material, and management did not believe existing proceedings would have a material adverse effect, while noting that future developments could affect results and liquidity.
Deloitte & Touche issued unqualified opinions on the financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal controls were effective, although certain 2018 acquisitions were excluded from the internal-control assessment.
Important facts for investors to verify
- Whether Hays and other 2018 acquisitions achieve projected revenue and EBITDA growth and whether integration costs or earn-out payments exceed expectations.
- Debt reduction, floating-rate exposure and compliance with leverage and interest-coverage covenants following the substantial increase in borrowings.
- The sustainability of 2.4% consolidated organic revenue growth and the recovery of National Programs organic revenue after lower weather-related claims revenue.
- The effect of ASC 606 and ASC 340 on quarterly revenue timing, margins, receivables and deferred costs.
- Whether the $3.433 billion goodwill balance remains recoverable if growth, cash flows or the stock price deteriorate.
- Cash requirements for acquisitions, dividends, repurchases, technology spending and the planned headquarters project.
- Exposure to contingent commissions, insurer financial condition, catastrophe activity, regulatory changes, cybersecurity events and unresolved litigation or claims.